SLN Was on the Move Today. What Is Up?

One of Wall Street's biggest winners of the day is Silence Therapeutics Plc, a biotechnology company whose shares have climbed 11.7% to a price of $9.61 -- 81.79% below its average analyst target price of $52.77. The average analyst rating for the stock is strong buy. SLN may have outstripped the S&P 500 index by 11.5% so far today, but it has lagged behind the index by 58.6% over the last year, returning -62.2%.

Silence Therapeutics is part of the healthcare sector, which includes the biotechnology, drug manufacturing, diagnostic and research, and medical supplies industries. Healthcare companies work in incredibly complex markets, and their valuations can change in an instant based on a denied drug approval, a research and development breakthrough at a competitor, or a new government regulation. In the longer term, healthcare companies are affected by factors as varied as demographics and epidemiology. Investors who want to understand the healthcare market should be prepared for deep dives into a wide range of topics.

As of the second quarter of 2022, the average Price to Earnings (P/E) ratio for US healthcare companies is 15.91, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes. Silence Therapeutic's trailing 12 month P/E ratio is -6.1. It does not have a forward P/E ratio because the company does not issue guidance.

Unlike earnings earnings, gross profits margins only take into account the company's cost of goods sold (i.e. cost of labor and materials only). The extent of gross profit margins implies how much freedom the company has in setting the prices of its products. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost. In SLN's case, the gross profit margins are 45.3%, which indicates that it potentially benefits from a sustained competitive advantage over its peers, allowing it to maintain highly profitable pricing structures.

Companies have many other costs and sources of income occurring outside of their core business. Everything from equipment depreciation, returns on capital investments, legal costs, income from intellectual property, and interest payments on debt factor into the company's ultimate profitability. We can see the effect of these additional factors in Silence Therapeutics Plc 's levered free cash flow of -$26,209,124.

If it weren't negative, the unlevered free cash flow would represent the amount of money available for reinvestment in the business, or for payments to equity investors in the form of a dividend. While a negative cash flow for one or two quarters is not a sign of financial troubles for SLN, a long term trend of negative or highly erratic cash flow levels may indicate the business is mismanaged.

Despite its negative P/E ratio, no published P/B ratio, and negative cash flows, Silence Therapeutics's excellent profit margins and an analyst consensus of strong upside potential lead us to conclude that it is likely a fairly valued stock at today's prices. Before you reach your own decision, be sure to check the numbers for yourself, especially focusing on their trends over the last few years. And don't forget to subscribe to our free daily equity newsletter!

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.